Size of Banks Killing Economy … But Giant Banks Have Only Gotten Bigger Since Financial “Reform” Enacted
For years, many high-level economists and financial experts have said that – unless we break up the giant banks – our economy will never recover, real reform will be blocked, and democracy and the rule of law will be corrupted.
So how did the government respond to the financial crisis which started in 2007?
Let the giant banks get even bigger.
As Bloomberg notes, the five banks that held assets equal to 43% of the US economy in 2007 before the financial crisis and the bank bailout now control assets that equal 56% of the US economy:
Two years after President Barack Obama vowed to eliminate the danger of financial institutions becoming “too big to fail,” the nation’s largest banks are bigger than they were before the credit crisis.
Five banks – JPMorgan Chase & Co. (JPM), Bank of America Corp., Citigroup Inc., Wells Fargo & Co., and Goldman Sachs Group Inc. — held $8.5 trillion in assets at the end of 2011, equal to 56 percent of the U.S. economy, according to the Federal Reserve.
Five years earlier, before the financial crisis, the largest banks’ assets amounted to 43 percent of U.S. output. The Big Five today are about twice as large as they were a decade ago relative to the economy, sparking concern that trouble at a major bank would rock the financial system and force the government to step in as it did during the 2008 crunch.
“Market participants believe that nothing has changed, that too-big-to-fail is fully intact,” said Gary Stern, former president of the Federal Reserve Bank of Minneapolis.
That specter is eroding faith in Obama’s pledge that taxpayer-funded bailouts are a thing of the past. It is also exposing him to criticism from Federal Reserve officials, Republicans and Occupy Wall Street supporters, who see the concentration of bank power as a threat to economic stability.
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The industry’s evolution defies the president’s January 2010 call to “prevent the further consolidation of our financial system.” Embracing new limits on banks’ trading operations, Obama said then that taxpayers wouldn’t be well “served by a financial system that comprises just a few massive firms.”
Simon Johnson, a former chief economist of the International Monetary Fund, blames a “lack of leadership at Treasury and the White House” for the failure to fulfill that promise. “It’d be safer to break them up,” he said.
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Regulatory burden could promote further industry consolidation, according to Wilbur Ross, chairman of WL Ross & Co., a private-equity firm.
“We think the little tiny banks, the 90-odd percent of banks that are under $1.5 billion in deposits, are pretty much an obsolete phenomenon,” he told Bloomberg Television on March 14. “We think they’ll all have to merge with each other, be acquired by bigger banks or something.”
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In 2011, funding costs for banks with more than $10 billion in assets were about one-third less than for the smallest banks, according to the FDIC.
Some presidents of regional Federal Reserve banks have lambasted too big to fail. As Bloomberg notes:
In recent weeks, at least four current Fed presidents — Esther George of Kansas City, Charles Plosser of Philadelphia, Jeffrey Lacker of Richmond and Richard Fisher of Dallas — have voiced similar worries about the risk of a renewed crisis.
But the most powerful Fed bank – the New York Fed – and Bernanke’s Federal Open Market Committee, as well as Tim Geithner’s Treasury Department, have done everything possible to ensure that the the giant banks become too bigger to fail.
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The larger a bank, the cheaper it is to counterfeit (create “credit”) since the bank is less likely to have to borrow from other banks or the Fed.
Btw, if many smaller banks are better than a few large ones then why shouldn’t EVERY US citizen be allowed to open an account at the Fed and be allowed to borrow at the same rates the banks borrow at? Why the special treatment for banks? Because our money system is fascist? Indeed it is.
Frank-Dodd passed but actually not implemented because the TBTF banks don’t like even that watered down compromise. The unexpected ballooning of the TBTF is very expected; it’s growth by design. The banks selected Obama as their president. The faux left jump on the band wagon mainly due to its CDS (Clinton Derangement Syndrome). The faux left had all the information it needed to evaluate Obama correctly; they chose not to.
If the cry now, these are gator’s tears.
56% of assets owned by just 5 companies. A 13% increase in 4 years. It’s almost as if it’s concentrating.
If it were simply linear, then:
69% in 2016.
82% in 2020.
95% in 2024.
They don’t produce anything, but somehow all our assets end up owned by the banks.
Is the goal 100%? What does everything look like with, say, 80% of assets in the hands of 5 companies – at least one of which paid no taxes, B.T.W.
In short, yes. The goal of the 1% is 100% ownership of everything. And they are doing bloody well at it, because the 99% are not stopping them.
Congress should pass legislation to stop the FED from paying interest on reserves to any bank (or financial) institution whose size is greater than 2% of the US GDP.
Full interest should be paid only to banks whose size is 1% or less of the US GDP. Pro rata amounts of interest from 100% at 1%, to 0% at 2%, should be paid to those banks with assets from 1-2%.
The official policy should be to encourage smaller sized banks, and reduce systemic risk of excessive size.
(This only helps; stronger laws might be needed and be appropriate.)
The interest on the reserves is a tool the Fed can use to put the brakes on inflation. Banks will not lend at rates lower than the reserve rate. When banks aren’t lending into the economy, inflation falls.
If the Fed ever lowers the rate paid on reserves, then things are nasty or getting nastier.
Last year the Fed received, net of operating expenses – including the .25% they pay on reserves now – $78B, and turned that over to the treasury, gratis.
That amount was earned on a near $3 trillion balance sheet.
So…unless I’m completely cucko thinking this way, I figure they can pay out $78B max on $3 trillion in base money to “control inflation”.
The Maths:
78E9/3E12=.026
or a 2.6% interest rate.
The actions of the Federal Reserve make very clear how having four too big to fail oligopolistic banks is costing the country dearly and is a tax on the economy on two accounts(government subsidies and uncompetitive pricing on financial products(mortgages, banking services, etc). It’s also not uninteresting that at least two of the large banks are insolvent and not in a position to really extend loans which can only be made when the balance sheet permits it.
What actions are you referring to?
Ah yes, Richard W. Fisher said that the Dodd-Frank bill: “may actually perpetuate an already dangerous trend of increasing banking industry concentration.”
According to Fisher, it’s time to break up the banks and end “too big to fail.” He’s the “Fed” and those were his “actions”.
But then other parts of the Fed grease themselves for high paying Wall Street positions taking the information they garner in Gov’mint service and then set out to make a killing.
The effers shouldn’t be allowed to engage in such things but it’s all over DC, this pathological revolving door. Dylan Ratigan spills his spleen in a pedestrian expose: “Ah shucks it’s appalling but what can we do!!!!?”
Susan Bie – BOA
Brian Sack
Laurence Meyer
Deborah Bailey
Meredith Beechey
Nathan Sheets – CitiBank
etc
I just posted a diary at My.Firedoglake with info from the Bloomberg piece. I included a video on Sacred Economics that NC commenter Pete had suggested, plus one of David Korten’s (the Living Economies Forum). I included a link to Korten’s video ‘Capitalism’s Threat to Democracy’.
The videos are heartening alternatives.
http://my.firedoglake.com/wendydavis/2012/04/18/criminal-financial-sector-v-sacred-economics/
Thanks for all you do, washingtonsblog. On the further Fukishima disasters brewing, too. Hard reading.
Banking concentration looks more and more like the final days of ancient Rome.
What do the politicians expect when their very bailout-prone policies and assurances give the larger financial institutions free leverage over the smaller financial institutions. Simon Johnson can pin it on the Treasury and White House only? How about the willfully ignorant and populace who keeps voting in the same type of politicians?
“Does this doctored-up balance sheet make my butt look big?”
Oh! the innumeracy!
I am no fan of the Big Banks, but this is the kind of thing that makes me suspicious:
“Let the giant banks get even bigger.
“As Bloomberg notes, the five banks that held assets equal to 43% of the US economy in 2007 before the financial crisis and the bank bailout now control assets that equal 56% of the US economy:”
Fine. But that is not necessarily bigger. We are in a depression, you know.
“Two years after President Barack Obama vowed to eliminate the danger of financial institutions becoming “too big to fail,” the nation’s largest banks are bigger than they were before the credit crisis.
“Five banks – JPMorgan Chase & Co. (JPM), Bank of America Corp., Citigroup Inc., Wells Fargo & Co., and Goldman Sachs Group Inc. — held $8.5 trillion in assets at the end of 2011, equal to 56 percent of the U.S. economy, according to the Federal Reserve.
“Five years earlier, before the financial crisis, the largest banks’ assets amounted to 43 percent of U.S. output.”
Note the omission. No mention of how many trillions in assets they held in 2006. Why not? My bet is that it is because it is more than $8.5 trillion. OC, I may be wrong, but then why not state the figure?
To echo Brad DeLong, why can’t we have a better press corps?
You should check your premise.
If the economy shrunk, then why didn’t the banks shrink at the same rate?
Any way you cut it, the banks increased their slice of the economic pie.
If the economy grew, and the banks grew disproprtionately, then great – it’s an expanding sector. But given the fact that banks were patient zero in this little financial pandemic, then they sort of came out like Typhoid Mary.
What about when their share increases to 99%?
“Any way you cut it, the banks increased their slice of the economic pie.”
Oh, sure, no argument. But then why isn’t the headline something like this?
Giant Banks Have Shrunk Less Than The Economy Since Financial “Reform” Enacted
GDP IS back where it was pre-crash. It’s just that we don’t need people to do it anymore. And the gov kicks $1.3 trillion a year borrowing from the future to make a good GDP number today.
The only criticism of the main post might be that the 5 big banks had to swallow the next lower tier when those failed. That contributed to the growth of the big 5 – countrywide assets and such….
GDP is back but personal net worth fell over $14 trillion in 2008 and has not returned despite an all-time high in total bank demand deposits. The broad loss in net worth is reflected in lower real estate values where large losses are shared by banks and consumers. Also bank market caps are far lower than 2007 highs. Bank of America alone has lost 80% of its market capitalization. Loan loss reserves are far higher now and balance sheets more substanstial today.